What is meant by Short Selling in share trading ?Please explain in detail? Explain with example in practical scenario ?
Thanks in Advance….
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I wrote an article on this a while ago for our new members. Maybe it can help you out too.
GETTING A LOAN:
This is not really going to be about getting a loan from the bank. Rather alone from your broker. More specifically shortselling stock. When you short sell a stock you are actually selling it in hopes of buying them back at a cheaper price. Although the process is usually automatic and transparent when you make a trade, there are several things that happen in the background. Technically, because you don’t own the stock, you have to borrow it from your broker.
For example, suppose XYZ is trading at $50 per share, and you place an order to sell 100 shares short. Your brokerage will have to credit your account $5,000. This credit is a loan, and your brokerage will charge you interest. If the stock price falls to $45, and you want to take your profit, you can buy back the 100 shares, leaving you $500 from the original $5,000 credit.
Although buy to cover or buy back are terms used for closing out a short sale, you are not actually purchasing the shares for your account, and the net result is that you will have no position in the XYZ, once the transaction is completed.
From the trader’s perspective, the entire process is as seamless as buying a stock. In other words, place in order to get into a trade, and you place an order to get out of the trade.
But for that trade to occur, the stock must be available to borrow through your brokerage. That is, someone else must be long the stock you want to short. This is usually not a problem, especially with stocks that have high liquidity. However, you must keep in mind that every brokerage has a so-called hard to borrow list. This is a list of stocks that can either not be shorted or must actually be found before shorting can occur.
Again, locating the stock is not your responsibility to, you must be aware that some stocks will be harder to short than others.
The second major requirement trader has in order to short sell stock, is his account must be a margin account. A margin account gives traders access to as much as two times the amount of money that he is in the account. Usually the minimum is $2000, which has to be maintained. That means your account total can not fall below this level, even if it isn’t stock positions. Daytraders however, have a higher requirement, which usually is around $25,000.
Margin accounts sound like a great deal at first. If you have $10,000 and a margin account, it will give you around $20,000 and buying power. This will give you leverage, enabling you to double your profits. However, you must be aware of the dangers. While it is possible to double your profits it is also possible to double your losses.
The biggest problem that I see with this is that generally, seasoned traders do not short sell stock. I usually see or hear of new investors or traders shortselling stock. And when you are a new investor/trader, a vast majority of your trades will end up being losers. This can lead to very large losses very quickly.
If you have been a member for a while now, you will notice that we have never once short sold stocks. We always use options to hedge our positions in a down market. Most commonly, we buy put options. But we can also sell covered calls on our positions. While these two are the most basic options strategies to replace shortselling stock, they are also the most easily understandable strategies, and most effective.
Christian Nago
CEO & Chief Investment Officer
http://www.intrepidtradings.com
In a nutshell, it’s a way to make money from a stock dropping in price. You pocket the difference (minus broker fees, dividends, and margin costs.)
You’ll need a margin account to short sell.
I’ll use a $100 dollar stock in this example but it should extend to any stock.
When you first short sell the stock at $100, you’re borrowing the stock from someone else and immediately selling it. You’ll essentially be borrowing $100 at your broker’s margin rate (say 8%.) And let’s say the dividend yield on this stock is $2/yr. And after a year, say the stock drops to $50.
In this scenario, when you buy the stock back in 1 year, you’ll make a profit:
100 – 8% * 100 – 2 – 50 = $40. This assumes no broker fees (only possible with very few brokers.)
short sellin g meant in the intraday if you dont have a stock in your account you can sell the share in the martket rate. and buy it in the same day when the share value come to low. thatis short selling.
in the realtime
at the time of 10.30am your selling 100 statebankof india share at the rate of 1000.
at the time of 11.00 the market is comming to low the statebank share value became 900 when the time the seller can buy 100 share at the rate of 900.
so he can get the profit of 100 per share . this is called as shortselling.
Basically, you make profits from the decline of the stock price.
http://dividend-growth.blogspot.com/
Some brokers, like one of mine, don’t allow short selling exactly.
They do allow covered call writing though. Which means you must own the stock to sell it short.
You do this if you think your stock is high priced but you think it will go down. If it does go down then you get to keep your stock and collect the premium paid on the call.
It is a way of protecting your current price against a downturn.
If it goes up the option "calls" your stock away and the stock is sold for the amount you sold it as an option. You collect the premium and the stock value but you don’t get the gains from it going up.